Vague Fed

Arnold Kling complains about vague fed policy.

Everyone is acting as if in order to maintain the Fed's independence, the Fed must be allowed to be vague about its targets, vague about how it might achieve those targets, secretive about how it thinks its actions influence those targets, and ad hoc in its approach to deciding when to take action. I would suggest re-examining such assumptions.

Part the Fed's focus in non-panic times is spent making sure they don't surprise the markets too much. In order to avoid surprising the markets, the Fed has to be vague in order to slowly walk the market towards their plans, which they are probably still in the process of figuring out.

"My suggestion is that, if you get asked those questions, just say we're examining nontraditional methods and there are many different ways in which we can address the issue. I would be as nonspecific as you know how to be. The major reason is that I don't think we will know until we start to address the issue." - Greenspan in 2003, discussing what the Fed might do as interest rates approach the zero bound

If they stated their shifting views in real time the market might react in an extreme manner when the message changed, and unexpected sources of volatility are generally harmful to a leveraged economy. Furthermore, if the message changed too often, there would eventually be points where the market might ignore the Fed due to the low signal to noise ratio. Then the Fed would lose control of the very useful tool of managing future expectations. So in order to keep this tool, they have to be very sparing with their use of clear messaging.
Filed under  //   economics  

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I studied Bioengineering at the University of California at San Diego. While there I served as a trustee on the investment committee of the UCSD Student Foundation, a group that manages an endowment to fund scholarships. While in college I applied my interest in finance and economics by working as a summer associate at Clarium Capital Management, working part time my senior year, and joining full time when I graduated in 2006, staying there through August 2010. I am currently working as a portfolio manager at another global macro hedge-fund in the Presidio (And blogging about more directly market related ideas at their restricted blog). I’ve been focusing on quantitative finance, currencies, commodities, the interplay between finance and politics, demography and other long term trends.

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